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TMI Blog1980 (7) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be included in the capital computation for the purpose of section 84/80J of the Income-tax Act, 1961, in respect of the assessment years 1967-68, 1968-69 and 1969-70 ? 2. Whether, on the facts and in the circumstances of the case, half of the profits of the year (i.e., the average profit of the year) should be included in the capital computation under rule 19(5) of the Income-tax Rules, 1962, for the purpose of section 84 of the Income-tax Act, 1961, for the assessment year 1967-68 ?" The three questions which are referred to us at the instance of the assessee are as follows : " (1) Whether the Tribunal was justified in holding that the above expenditure (i.e., the expenditure of Rs. 20.46 lakhs) did not relate to the business of the assessee for the year under appeal ? (2) Whether the Tribunal was justified in holding that the amount of Rs. 20.46 lakhs paid to the Gujarat Electricity Board was of a capital nature? (3) Whether the Tribunal was justified in not allowing the above expenditure as revenue expenditure deductible under section 28(1) or under section 37 of the Income-tax Act, 1961 ?" The facts leading to these references are as follows : The relevant year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ITO completely excluded the fixed deposits in computing the capital employed. He thus computed the capital employed in the business for the purpose of s. 84 read with r. 19(1)(c) for the assessment year 1967-68 and s. 80J read with r. 19A for the assessment years 1968-69 and 1969-70 after partially excluding the value of the said deposit for the assessment year 1967-68 and wholly excluding the same for the assessment years 1968-69 and 1969-70. Against this part of the decision of the ITO, when the matter was carried in appeal before the AAC by the assessee, the AAC agreed with the view of the ITO. Again, when the matter was taken in further appeal before the Income-tax Appellate Tribunal, the following figures were pointed out to the Tribunal, namely, that the opening balance in the fixed deposit account was Rs. 20.50 lakhs so far as the assessment year 1967-68 was concerned and the closing balance was Rs. 21 lakhs. For the assessment year 1968-69, the opening balance was Rs. 21 lakhs and the closing balance was Rs. 27 lakhs and for the assessment year 1969-70, the opening balance was Rs. 27 lakhs and the closing balance was Rs. 21.50 lakhs. The assessee pointed out that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous year amounting to Rs. 1,64,019 should be included under r. 19(5) of the I.T. Rules in computing the capital base. This contention was negatived by the ITO and the AAC in appeal. The Tribunal, following the decision of this High Court in CIT v. Elecon Engineering Co. Ltd. [1976] 104 ITR 510, held that one-half of the average profits should be included in computing the capital base under r. 19(5) of the I.T. Rules, 1962, and question, No. 2 which has been referred to us at the instance of the revenue relates to this part of the Income-tax Appellate Tribunal's order. As regards the three questions referred to us at the instance of the assessee, the facts are that the assessee-company incurred an expenditure of Rs. 20.46 lakhs which amount was paid to the Gujarat Electricity Board for the purpose of laying electric transmission lines, cable lines, etc. This expenditure was claimed for the assessment year 1969-70. The ITO held that the impugned expenditure was of capital nature. This view of the ITO was upheld by the AAC. The ITO held that the impugned amount represented an advance to the Gujarat Electricity Board and did not represent any expenditure incurred by the assessee dari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits or losses made in that period shall, except so far as the contrary is shown, be deemed (a) to have accrued at an even rate throughout the said period; and (b) to have resulted, as they accrued, in a corresponding increase or decrease, as the case may be, in the capital employed in the business. " It may be pointed out that so far as assessment years 1968-69 and 1969-70 are concerned, s. 84 was not in force but in those years s. 80J of the I.T. Act applied to deductions to be made in accordance with the provisions of the sections and the rules prescribed in that behalf. Section 80J provided- "Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the deduction, if any, admissible to the assessee under section 80HH) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent. per annum on the capital employed in the indus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ested in short-term deposits, did not mean that there was any investment of these moneys or that they ceased to be assets employed in the business of the company. The moneys were not immediately required for the purpose of the business of the company, but they were all the same required for the business of the company because only such moneys as were not immediately required were deposited by the assessee-company as a prudent businessman on short-term deposits. As the Tribunal has rightly pointed out, there was no intention of investing these moneys. It was merely with a view to earn some amount of interest on these fixed deposits, of moneys, not as part of its investment activity but doing something which a prudent businessman would do that the deposits were made. Under these circumstances, so far as this question of amounts invested in short-term deposits is concerned, in our opinion, the Tribunal was right in holding that this amount did represent capital employed in the business in each of these three years under consideration and for the purpose of relief under s. 84 and deduction under s. 80J for the relevant years, these amounts were rightly directed to be included by the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rying on mining operations of extracting fluorspar, a mineral, from its mining operations at the mines situated in Baroda District. What is meant by " Beneficiation Plant " can be gathered from McGraw-Hill Encyclopaedia of Science and Technology, Vol. 9, at p. 449. It seems that beneficiation is a part of what is known as " Ore dressing " ........ treatment for the purpose of improving the quality of ore sold to customers by a company carrying on mining operations. It is " treatment of ores to concentrate their valuable constituents (minerals) into products (concentrate) of smaller bulk, and simultaneously to collect the worthless material (gangue) into discardable waste (tailing). The fundamental operations of ore-dressing process are the breaking apart of the associated constituents of the ore by mechanical means (severance) and the separation of the severed components (beneficiation) into concentrate and tailing, using mechanical or physical methods which do not effect substantial chemical changes ". It has been pointed out that the " step of beneficiation consists of two fundamental operations; the determination that an individual particle is either a mineral or a gangue partic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. " This passage from the speech of Lord Cave has been explained by the Supreme Court in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1. At p. 10 of the report, Bhagwati J., speaking for the Supreme Court, has pointed out : "This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure 'so long as the benefit is not so transitory as to have no endurance at all'. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the advantage was not in the capital field, it could not be said to be an expenditure of a capital nature. As we have pointed out, while arriving at this conclusion, we are prepared to proceed on the footing that the advantage which the assessee-company got was an advantage of an enduring nature, but applying the test culled out by the Supreme Court in Empire Jute Co.'s case [1980] 124 ITR 1, it is obvious that, in spite of the presumption, it can be held on the facts and circumstances of this case that the expenditure was not of a capital nature but was of a revenue nature. As regards the year of account, it must be pointed out that the assessee claims this expenditure in respect of assessment year 1969-70, the these supply lines by the Gujarat Electricity Board. It seems that in the earlier previous year, that is, in the year of account 1967-68, the assessee had shown in its books the expenditure of the sum of Rs. 19,00,000 as having been paid by way of advance for the installation of these electric lines and in the relevant year of account, namely, the income year 1968-69, the assessee-company showed the entire amount of Rs. 20.46 lakhs as having been spent for laying of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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